Session 16(BenchMarking& Cost of Quality)

7/30/2019 Session 16(BenchMarking& Cost of Quality)

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Session 16(Chap. 7 & 8)

Benchmarking (Ch -7)andPerformance Management

Through Cost of Quality (Ch -8)

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Benchmarking Benchmarking the search of industry best

practices that lead to superior performance. Best practices approaches that produce exceptional

results, are usually innovative in terms of the use of

technology or human resources, and are recognized

by customers or industry experts.

Hierarchy of Best Practices

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World Class

Any Orgz. USA, etc..

Industry -wide

Competitor

Internally


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Gaining Insight Through

Benchmarking

Benchmark

A benchmark is an organization recognized for its

exemplary operational performance.

There are many benchmarks in the world includingToyota for processes, Intel for design, Motorola

for training, Scandinavian Airlines for service,

and Honda for rapid product development.

Benchmarking The sharing of information between companies, so

that both can improve.


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Purposes of Benchmarking

I Learning from successes

II Borrowing ideas

III Best-in-firm

IV Beating industry standards

V Best-in-class

VI National leadership

VII Best-in-World


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Types of Benchmarking1. Internal benchmarkingOrgz. Need not always

look outside to find out the best practices.

They could study the best performing division inhouse.

E. G against the measures such as

cycle time

error rate

quality cost;

customer feedback etc.E. G. -- Error in dvn. Is 1ppb(parts per billion) & other1%. Obj improve it.

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Types of Benchmarking - Contd..

2. Competitive benchmarking When an orgz. Isperforming well, they will definitely advt. andmake their performance indicators public.

Such data like:

pricing,technical quality,

features, and

other quality or performance

characteristics of products and services.E.g. Motorola looked to Dominos & Federal Express

--- to speed up the del system.

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Types of Benchmarking - Contd..3. Process benchmarking

Strategy ---- expressed in terms of mission &vision statements

E.G. Take the case of 2 Insurance Orgzs.

A. Ist Orgz vision as becoming the easiest inthe industry to do business with.

Emphasizing Speed of writing policies & an

outstanding level of cust. Service.Benchmarking Customer Service Processes

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Types of Benchmarking - Contd..

B. IInd Orgz intends to reduce the cost of

insurance through excellent investment

performance.

Benchmarking Investment Processes

How : By hiring & training good financial

managers, using telecommn. To track & act

upon the developments in the global money

markets.

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Benchmarking

Selecting best practices to use as a standard

for performance

Determine what to benchmark

Form a benchmark team

Identify benchmarking partners

Collect and analyze benchmarking information

Take action to match or exceed the benchmark

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Reasons for measurement

If you dont measure results, you cant tell

success from failure

If you cant see success, you cant reward it

and will probably end up rewarding failure

If you cant recognize failure, you cant correct

it.

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The Cost of Quality (COQ)

COQ the cost of avoiding poor quality, or

incurred as a result of poor quality

Translates defects, errors, etc. into the

language of management Rupees

Provides a basis for identifying improvement

opportunities and success of improvement

programs

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Common Process Quality Measures

Nonconformities (defects) per unit In Mfg.

Sector its implications in liability suits.

Errors per opportunityanalogous to defects

per unit, each customer transaction provide

an opportunity for many diff types of errors.

Dpmo defects per million opportunities

common measure to both Mfg & services.

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Prevention Costs

Quality planning costs costs of developing and

implementing qualitymanagement program

Product-design costs costs of designing products

with quality characteristics

Process costs costs expended to make sure

productive process conformsto quality specifications

Training costs

costs of developing andputting on quality trainingprograms for employees andmanagement

Information costs

costs of acquiring andmaintaining data related toquality, and development ofreports on quality

performance

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Appraisal Costs Inspection and testing

costs of testing and inspecting materials, parts, andproduct at various stages and at the end of a process

Test equipment costs costs of maintaining equipment used in

testing quality characteristics of products Operator costs

costs of time spent by operators to gatherdata for testing product quality, to make

equipment adjustments to maintain quality,and to stop work to assess quality

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Internal Failure Costs

Scrap costs costs of poor-quality products

that must be discarded,including labor, material, andindirect costs

Rework costs costs of fixing defective

products to conform to qualityspecifications

Process failure costs

costs of determining whyproduction process isproducing poor-qualityproducts

Process downtime costs

costs of shutting down

productive process to fix

problem

Price-downgrading costs costs of discounting poor-

quality productsthat is,

selling products as seconds

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External Failure Costs

Customer complaint costs costs of investigating and

satisfactorily responding to acustomer complaint resulting froma poor-quality product

Product return costs costs of handling and replacingpoor-quality products returned bycustomer

Warranty claims costs costs of complying with product

warranties

Product liability costs litigation costs resulting

from product liabilityand customer injury

Lost sales costs

costs incurred becausecustomers aredissatisfied with poorquality products and donot make additional

purchases

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Measuring and

Reporting Quality Costs Index numbers

ratios that measure quality costs against a

base value labor index

ratio of quality cost to labor hours

cost index ratio of quality cost to manufacturing cost

sales index ratio of quality cost to sales

production index ratio of quality cost to units of final product

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Quality Costs and Index

YEAR

2001 2002 2003 2004

Quality Costs

Prevention $ 27,000 41,500 74,600 112,300

Appraisal 155,000 122,500 113,400 107,000Internal failure 386,400 469,200 347,800 219,100

External failure 242,000 196,000 103,500 106,000

Total $ 810,400 829,200 639,300 544,400

Accounting MeasuresSales $ 4,360,000 4,450,000 5,050,000 5,190,000

Mfg costs 1,760,000 1,810,000 1,880,000 1,890,000

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Index

Year Quality Quality Mfg

Sales Index Cost Index

---------------------------------------------------------2001 18.58 46.04

2002 18.63 45.18

2003 12.66 34.002004 10.49 28.80

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QualityCost Relationship

Cost of quality

Difference between price of nonconformance

and conformance Cost of doing things wrong

20 to 35% of revenues

Cost of doing things right

3 to 4% of revenues Profitability

In the long run, quality is free

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Quality and Productivity

Quality improvement reduces inputs

Fewer defects increase output

Productivity =output

input

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Measuring Yield and Productivity

where

Y = yieldI = number units started in production

% G = percentage good units

% R = percentage of defective units reworked

Yield = (total input) (% good units) +

(total input)(1 - % good units)(% reworked)

Y= (I)(%G) + (I)(1 - %G)(%R)

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Product Yield

Start 100 motors per day

80% are good

50% of poor quality units can be reworked

Yield= (I)(%G) + (I)(1 - %G)(%R)

Y= 100(0.80) + 100(1 - 0.80)(0.50)

= 90 motors

Y= 100(0.90) + 100(1 - 0.90)(0.50)

= 95 motors

If product quality is increased to 90% good,

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Product Cost

Product cost =(Kd)(I) + (Kr)(R)

Y

Product cost =

(direct manufacturing cost per unit)(input) +(rework cost per unit)(reworked units)

yield

where

Kd = direct manufacturing cost per unitI = input

Kr = rework cost per unit

R = reworked units

Y = yield

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Product Cost

Direct mfg cost = $30, Rework cost = $12

100 motors started, 20% defective

50% of defective motors can be reworked

Product cost =

(Kd)(I) + (Kr)(R)

Y

Product cost = = $34.67 per motor($30)(100) + ($12)(10)

90 motors

The manufacturing cost after quality improvement is

Product cost = =$32.21 per motor($30)(100) + ($12)(5)

95 motors

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Multistage Product Yield

Y= (I) (%g1)(%g2)...(%gn)

where

I= input batch size

%gi = percent good at stage i

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Multistage Process Yield

Start with100 motors

AVERAGE PERCENTAGESTAGE GOOD QUALITY

1 0.93

2 0.95

3 0.97

4 0.92

Y = (I) (%g1)(%g2)...(%gn)

= (100)(0.93)(0.95)(0.97)(0.92)

Y = 78.8 motors

Solve for I

I= = = 126.8 motorsY

(%g1)(%g2)...(%gn)

100

(0.93)(0.95)(0.97)(0.92)

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Quality Productivity Ratio (QPR)

Includes productivity and quality costs

Increases

if processing or rework costs decrease

if process yield increases

QPR = (100)Good quality units(input)(processing cost) +

(defective units)(rework cost)

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QPR Example

Direct cost = $30/unit Rework cost = $12/unit

Start with 100 motors per day

80% are good, 50% of defective units can be reworked

Company studies 4 changes

1. Increase production to 200 units/day

2. Cut processing cost to $26 & rework cost to $10

3. Increase yield to 95%4. Combine 2 and 3

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QPR Example

Direct cost = $30/unit Rework cost = $12/unit

Start with 100 motors per day

80% are good, 50% of defective units can be reworked

Base case:

QPR = ( 1 0 0) = 2.8980 + 10

(100)($30) + (10)($12)

Case 1: Increase input to capacity of 200 units

QPR = (100) = 2.89160 + 20

(200)($30) + (20)($12)

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QPR Example

Case 3: Increase initial good-quality to 95%

QPR = (100) = 3.2295 + 2.5

(100)($30) + (2.5)($12)

Case 4: Decrease costs and increase initial good-quality

QPR = (100) = 3.7195 + 2.5

(100)($26) + (2.5)($10)

Case 2: Reduce processing cost to $26 and rework to $10

QPR = (100) = 3.3380 + 10

(100)($26) + (10)($10)

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Return on Quality (ROQ)

ROQ measure of revenue gains against costs

associated with quality efforts

Principles

Quality is an investment Quality efforts must be made financially

accountable

It is possible to spend too much on quality

Not all quality expenditures are equally valid

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Problem - 1At H & S motor Company, motors are produced in 4 stage process. Motors are

inspected foll. Each stage, with % yield (on avg) of good quality, WIP units

are as follows:

Stage Avg % good quality

-------------------------------------------1 0.93

2 0.95

3 0.97

4 0.92

--------------------------------------------------------

The company wants to know the daily product yield for pdt. Inputof 100 units per day. Further more, it would like to know how

many input units, it would have to start with each day to

result in a final daily yield of 100 good quality units.

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Problem -2 (QPR)

A retail tel. Co. takes catalogue orders from customers

& then sends the completed orders to the W/H to befilled. An operator processes on an avg of 45

orders/day.

The cost of processing orders is Rs. 1.15 and it cost Rs.

0.65 to correct an order.

An operator averages 7% bad orders per day, all of

which are reworked prior to filling the customer

order.Determine the QPR for an operator.

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Thanks

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Session 16(BenchMarking& Cost of Quality)

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